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Bullard Discusses the Fed’s Monetary Policy Framework Review

Thursday, August 29, 2019

Federal Reserve Bank of St. Louis President James Bullard discussed the Federal Reserve’s monetary policy framework review in a St. Louis Fed Timely Topics podcast that was released Aug. 14, 2019. The following excerpts are from the podcast. They have been lightly edited for clarity and length.

What does the Federal Reserve’s monetary policy framework review entail?

I would say that it’s best practice among central banks to review their policymaking framework on a regular basis, let’s say five or seven years. This was pioneered by the Bank of Canada. I think this gives an opportunity to think about changes that might be made outside of the normal policy cycle because you don’t want this to get wrapped up with current-day decision-making on monetary policy. This is more long-run thinking about monetary policy strategy.

What is the Fed’s current strategy for meeting its dual mandate of price stability and maximum employment?

I think most people would describe the current strategy as inflation targeting. The Fed named an official inflation target in January 2012. We conduct policy to try to maintain that rate of inflation over time, but we also adjust appropriately to meet the employment side of our mandate. Ideally, we’d be able to hit both at the same time.

The only problem with this framework is that it may lead to inflation being too low on average over time because, as we found out in the last 10 years, the policy rate can hit the effective lower bound. And when it does that, then you have to resort to other types of policies like quantitative easing and so on. Because of that, people are thinking about: Well, are there ways to better manage the monetary policy framework going forward?

What are some possible alternative strategies that the Fed is discussing during this review?

The key alternative would be to target the price level instead of targeting the inflation rate, which sounds like a minor change. But what it would say is that you pay attention to the fact that you might miss your inflation target, let’s say, to the low side for a while. Then you might make up for that by missing your inflation target to the high side for a while so that, on average, you still hit the inflation target. That’s often called price-level targeting as opposed to inflation targeting, which has a subtle difference. In inflation targeting, if you were below target, you would just try to go back to the target. You wouldn’t try to go above the target.

So, the good thing about price-level targeting type strategies is that you hit the inflation rate better on average during the long run. This better cements inflation expectations, and so you get better policy out of that. I would also say that price-level targeting is closely related to nominal GDP targeting, which is another version of the same idea basically.

The review also looks at ways in which the Fed communicates monetary policy. What do you think is going well?

The U.S. has begun to meet an international standard by having press conferences after every meeting. I think markets always want to know what the Federal Reserve is thinking, what the Federal Open Market Committee is thinking. Even if nothing is happening, they want to know, “OK, nothing is happening.” So, we’ve begun to do that this year, and I think it does provide better communication on the whole. So, I think it’s working well.

Are there further improvements in communication that you’d like to see?

The Committee has a Summary of Economic Projections, with the so-called dot plot, which is put out once a quarter. I don’t think our communication there is as good as what foreign central banks have. The Bank of England and the European Central Bank put out more comprehensive descriptions of their forecasts—usually their staff forecasts—and then the policymakers themselves can comment on the staff forecast, which I think is maybe one way that we could change the system that we use. So, I think there are some improvements that could be made.

This monetary policy framework review includes Fed Listens events throughout the Federal Reserve System. What is the purpose of holding these events? Can you describe the setup for the upcoming meeting here in St. Louis in September and what you hope to learn from that meeting?

We wanted the framework review to get input from a wide variety of sources, and we’re certainly doing that. We’ll basically talk to anybody who is interested in this, but, in particular, constituents in the various parts of the country. We’re doing that in the Eighth District.

What we’re going to do for our Fed Listens event is bring all our councils together on a single day into St. Louis and get the whole shebang at one time. That’s a special event. But it just reflects part of what we do all the time here at the St. Louis Fed, which is try to stay in close touch with economic actors on the ground and see what’s happening in their lives and their businesses on a day-to-day basis in order to allow that to be an input into monetary policy.

What will policymakers at the Fed do with the information gathered during this whole review?

I think the code word here is evolution, not revolution. I don’t think we want to give the impression that we’re going to overturn the current Fed operating framework or strategic framework overnight. I don’t think that’s realistic or desirable. But I do think that many of these ideas will feed into future monetary policy as we go forward and creep in in various ways. Some of them might be more visible than others, but I would not expect a manifesto to come out that radically reorients Fed policy.

This is not necessarily meant to suggest that there are big changes afoot. But it is meant to be thoroughgoing, get lots of input and think about these issues deeply on a calendar basis, something like five or seven years. Because otherwise you might go 50 years and you never changed your framework, and it gets badly out of date and it really doesn’t work very well. But because you’ve never thought about the strategy, you’ve never changed it. And if you are going to change it, you would have to change it in small ways in order to make progress.

Anything else about the Fed’s monetary policy framework review?

I just think this is such a good kind of corporate practice. So, I do think it’s a good thing that we’re doing. When you think about the crisis 10 years ago, we had to do a lot of improvisation, on-the-run changes in monetary policy, new tools being introduced. That causes a lot of volatility. People aren’t really sure how this is going to work. Policymakers themselves aren’t really sure how it’s going to work. So, I think it’s very useful to try to do as much as you can in good times so that when bad times come again, you’ve at least got some basis to go ahead and make decisions.

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